Common SBA 504 Loan Myths and Misconceptions

The U.S. Small Business Administration's (SBA) loan programs have garnered much criticism over the years. Some complaints may have been warranted in the past, but these days, the SBA is different.

Increased accountability and newly implemented efficiencies are a terrific development for U.S. taxpayers and for America's small-business owners.

Many entrepreneurs - and far too many brokers, ironically - dismiss the SBA because of its more well-known 7(a) lending program. This program is most often in the news and nearly always seems to be in crisis or in need of supplemental appropriations. Whether or not the 7(a)'s reputation is deserved, its negative attention has managed to tarnish other effective and lesser-known SBA programs. But 7(a)'s parameters do not apply to all SBA programs, despite some brokers thinking otherwise.

Below are some of the most common, lingering myths and misconceptions regarding SBA loans that we hear in the industry. If you would like to clarify something you've heard about SBA loans or would like more information on our SBA 504 Loan Program, please feel free to contact us.

Myth:	SBA loans take too long.

Fact:	The SBA is aware of small-business owners' time and of how busy they are. Its certified development companies (the SBA's representatives on these loans) now move quickly. They often can examine borrowers' underwriting documents in only 48 hours. Once lenders scan their borrowers' documents, they can actually "drag and drop" them onto some of the certified development companies' or SBA secure servers. This technological innovation saves the time of doing overnight mail and is a huge improvement in the slow-adapting commercial-mortgage industry. If an SBA loan's approval process takes more time than this, it may be that a particular lender is holding it up.


Myth:	SBA loans have too much paperwork.

Fact:	There have been great efforts to streamline the overall application process. In some cases, they can nearly match the paperwork of what any ordinary 80 percent loan-to-value conventional commercial lender would need to approve a loan. Some borrowers find this paperwork is far less than what they had to complete when they refinanced their home loan. Specialized commercial lenders have helped this along, too.


Myth:	SBA loans are only for the worst borrowers or for startups.

Fact:	Unlike other SBA programs, 504 loans have no revenue or employee limits, and for practical purposes, they cap out around $6 million for most projects. Some SBA programs are for businesses still in their infancy or for startups. Overwhelmingly, however, 504 loans are not meant for new businesses that should be more concerned with using their capital to establish their place in the competitive landscape. Many 504 loan borrowers are companies that have tens of millions in sales.The equity savings gained from SBA 504 loans are meant to provide economic development. Unhealthy companies simply cannot do this. Plain and simple, this loan program is a means of leveling the playing field for healthy small businesses contemplating commercial-property ownership.


Myth:	SBA loans have too many fees.

Fact:	Unfortunately, this myth has been unjustly applied to all programs under the agency's umbrella. While this is the reality for the 7(a) loan's multitiered fee system, 504 loans recently had their already-lower fees reduced for the third-consecutive year. In truth, origination fees for SBA 504 loans average about 25 to 50 basis points higher than ordinary commercial-bank loans. However, even these fees usually can be negotiated for borrowers with better debt-service-coverage ratios and personal credit. With the 504 loan product, these slightly higher fees seem reasonable and small for most business-owners. They understand that getting the highest cash-on-cash return available in the commercial-mortgage industry is paramount. This type of financing is tailor-made for small-business owners who want to decide where and when to best use their hard-earned capital yet still enjoy the advantages of property-ownership.


Myth:	SBA loan rates are higher than conventional lending.

Fact:	SBA 504 loans nearly always have fixed rates. The effective, blended interest rates are competitive with conventional bank financing. In addition, the government-guaranteed second mortgage on 504 loans is the cheapest money available for typical small-business owners who want to own their commercial real estate.


Myth:	All SBA lenders are the same.

Fact:	Most credit criteria vary from lender to lender. For example, different lenders may focus on financing varying property types, or they may have differing requirements for management experience or historic cash flow. It can be tempting to choose a lender based on rates alone, but other factors also are important.

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